Danaher Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Danaher reported unaudited results for the three months ended March 30, 2018, compared with the three months ended March 31, 2017. Continuing operations comprise Life Sciences, Diagnostics, Dental, and Environmental & Applied Solutions. The 2017 comparison includes $22.3 million of after-tax earnings from discontinued operations; Q1 2018 had none.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Sales | $4.695 billion | $4.206 billion |
| Gross profit / margin | $2.644 billion / 56.3% | $2.334 billion / 55.5% |
| Operating profit / margin | $743 million / 15.8% | $617 million / 14.7% |
| Continuing-operations net earnings | $566.6 million | $483.8 million |
| Diluted EPS from continuing operations | $0.80 | $0.69 |
| Operating cash flow from continuing operations | $828.9 million | $560.2 million |
| Capital expenditures | $137.9 million | $158.6 million |
Operating cash flow less capital expenditures was approximately $691 million, versus $402 million in the prior-year quarter. At March 30, cash and equivalents were $1.046 billion, total debt was $10.509 billion, and long-term debt was $10.411 billion. Cash increased from $630.3 million at year-end 2017; total debt was $10.522 billion at that date. Current assets were $7.075 billion and current liabilities $4.443 billion. The company reported compliance with all debt covenants and no borrowings under its $4.0 billion revolving facility or new $1.0 billion 364-day facility.
Material changes and segment performance
- Sales rose 11.5%; management reported core sales growth of 5.5%, excluding 1.0% acquisition contribution and 5.0% favorable currency impact. Gross margin improved 80 basis points and operating margin improved 110 basis points.
- Life Sciences sales increased 13.0% (5.5% core); operating margin rose to 18.4% from 16.2%.
- Diagnostics sales increased 14.5% (9.5% core); operating margin rose to 16.3% from 11.6%. Management cited strong molecular diagnostics demand, including flu-season-related testing.
- Dental sales increased 2.5% as reported but declined 3.0% on a core basis; operating margin fell to 7.6% from 13.6%. Management cited distributor inventory reduction, industry distributor realignment, weaker North American demand, lower pricing, and growth investment costs.
- Environmental & Applied Solutions sales increased 12.5% (4.5% core); operating margin declined to 22.1% from 22.7%, partly due to acquired-business dilution.
- SG&A was 34.1% of sales versus 34.5%; R&D was 6.4% in both periods. Interest expense was $39.1 million versus $40.3 million.
Outlook, commentary, and risks
- Management expected overall year-over-year sales growth to continue through 2018, while cautioning about macroeconomic and geopolitical uncertainty, including trade, monetary, and fiscal policy. No quantified full-year sales or earnings guidance was provided.
- Management estimated that prevailing March 30 exchange rates would increase full-year 2018 sales by approximately 3.5% year over year; further U.S. dollar strengthening could adversely affect results.
- Management forecast a remaining-2018 effective tax rate of approximately 20.5%, subject to changes in earnings mix, tax items, and implementation of tax regulations. The Q1 effective rate was 20.5%, versus 17.3%.
- In April 2018, after quarter-end, Danaher acquired Integrated DNA Technologies for approximately $2.0 billion, including assumed debt and net of cash acquired. IDT reported approximately $260 million of 2017 revenue. Danaher said it financed the purchase with available cash and commercial paper; a $1.0 billion 364-day facility had been arranged to support liquidity.
- Danaher forecast approximately $700 million of capital spending in 2018 and pension contributions of approximately $30 million for U.S. plans and $55 million for non-U.S. plans.
- A Danish tax dispute involves assessments of approximately $254 million, including interest, for 2004–2009, with a further assessment of approximately $150 million anticipated for 2010–2012. Management disputes the tax authority’s position; resolution is uncertain and could materially affect results, including the effective tax rate.
- The 2017 Tax Cuts and Jobs Act resulted in a provisional $1.2 billion transition-tax liability, payable over eight years. The company had not completed its accounting policy analysis for GILTI, and the final tax effects could differ materially from estimates.
- Other disclosed risks include economic and market conditions, competition, acquisition integration, foreign exchange, regulatory and product risks, cybersecurity, indebtedness, litigation, and potential impairment of goodwill or intangibles. Management reported no material change in risk factors during the quarter.
- Accounting changes included adoption of ASC 606, which increased opening retained earnings by $3 million and had no significant Q1 financial statement impact. Danaher also early adopted guidance reclassifying $151 million of tax effects from accumulated other comprehensive loss to retained earnings.
Important facts for investors to verify
- Whether core growth and margin gains persist, particularly given Dental’s lower core sales and sharply reduced operating margin.
- The acquisition’s final financing, integration, and contribution to earnings, including commercial-paper use and leverage after the IDT purchase.
- Developments in the Danish tax assessments, the final effects of U.S. tax reform, and the company’s GILTI accounting election.
- Actual full-year sales, tax rate, capital spending, and pension contributions compared with management’s stated expectations.